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Research reveals that further increases in inflation may be beneficial

14 June 2011

RiskFirst research shows that an increase in
inflation of 1.4% above current market levels would have a net
positive impact on the funding positions of the pension schemes of
the FTSE 100

According to new research by technology provider RiskFirst,
further increases in inflation may actually prove beneficial to
FTSE 100 pension schemes. The research suggests that increases in
inflation are costly for FTSE 100 schemes only up to a level of, on
average, 1.4% above the current market rate. Inflation increases
beyond this level - the so-called "tipping point" - should result
in improved funding levels, as caps on pension increases to members
come into play.

Office of National Statistics (ONS) figures released today show
the Retail Price Index (RPI) inflation figure will hold at 4.5%,
but predict it will rise to 5.0% later in the year.. "Since the
early 1990s inflation levels have remained below the cap levels
associated with most pensions and increases in liabilities as a
result of higher inflation have not been matched by increases in
overall asset values," says Matthew Furniss, an Assistant Vice
President at RiskFirst. "Inflation increases to date have
therefore worsened funding positions for the FTSE 100. However,
given the ONS inflation figures released today, we are not far away
from the point at which inflation increases should start to reduce
rather than increase deficits."

Benjamin Reid, CEO of RiskFirst Analytics adds: "Individual
schemes' tipping points will differ depending upon the specific
nature of both the scheme's benefit structure and its asset
portfolio. At a time when inflation is rising and becoming more
uncertain, pension schemes can benefit from understanding their own
individual risks from inflation in both the short term and longer
term, and across liabilities and assets. Without this insight into
scheme's sensitivity to inflation it is difficult to make informed
analysis as to the right way forward for investment strategies and
de-risking activities."